ABA Journal

The New Normal

Volkswagen: Where were the lawyers?

By Paul Lippe

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Paul Lippe

With Volkswagen reeling from one of the worst corporate scandals of our time, let’s consider the same question asked of Enron and other similar debacles: Where were the lawyers?

According to the New York Times, Volkswagen said that 11 million of its diesel cars worldwide were equipped with software that was used to cheat on emissions tests.

Volkswagen’s conduct is quite egregious, a concerted fraud around the core value proposition of “clean diesel.” Somebody at Volkswagen deliberately conspired to manipulate tests run by a multitude of government agencies to mask emissions. No wonder the potential consequences for Volkswagen are severe.

By contrast—see the GM Internal Investigation Report (PDF)—in the GM scandal, a single engineer made a bad (at least in hindsight) design decision to use a cheaper ignition switch, which shut off when bumped in moving cars. This was compounded because the airbags didn’t deploy when the ignition switch was off (a different engineering decision, maybe bad, maybe not). Then the switch engineer approved a redesigned switch without telling anybody (good design decision, bad communications decision), which meant that the problem stopped in newer cars, so GM had trouble reproducing it when reported in older cars.

So GM got condemned not so much for the original poor design decision, as for failure to respond properly to what I’ll call “correlated anomalies.” The GM general counsel, Michael Millikin, was, as they say, thrown under the bus.

One tenet of the New Normal is that we’ve moved into a world of transparency where any improper action is almost certain to be revealed over time. So most of these shortcuts are unwise before they are unethical. But what most litigation and enforcement actions reveal is that most companies are relatively less transparent to themselves—the bad actions are not obvious when occurring, only in hindsight. And while most legal regimes attribute bad actions to the enterprise as a whole, the practical reality is the “company” may not really know. It’s the responsibility of lawyers to bridge that gap.

Which leads to the iconic DieselGate question: What did Volkswagen’s lawyers know, and when did they know it? Perhaps there are seven possibilities:

• The Volkswagen engineers who devised and implemented the emissions test manipulation explained what they were doing to Volkswagen’s in-house lawyers and got a green light. This seems quite unlikely. 2 percent.

• The Volkswagen engineers explained what they were doing to Volkswagen’s in-house lawyers, the lawyers told them not to do it, but the engineers did it anyway. This seems even more unlikely. 1 percent.

• The Volkswagen engineers discussed what they were doing with Volkswagen’s in-house lawyers in a vague way that the lawyers didn’t really understand, and the lawyers did not explicitly object. Now we’re more into the realm of the possible. Call it 12 percent.

• The Volkswagen engineers included in their plan a deliberate effort to hide what they were doing from Volkswagen’s in-house lawyers. I’m going to put this back into the low probability column. Possible, call it 10 percent.

• The Volkswagen engineers neither discussed with nor hid what they were doing from Volkswagen’s in-house lawyers, and the in-house lawyers didn’t realize what was going on. Most likely, maybe 50 percent.

• The Volkswagen engineers neither discussed with nor hid what they were doing from Volkswagen’s in-house lawyers, and the in-house lawyers didn’t ask the engineers any questions, even though they were nervous, and created some record of their concern. Call this “Don’t Ask, Don’t Tell.” Remember that everyone knew that “clean diesel” was a very hard engineering challenge, and Volkswagen had manipulated emissions tests before, so it is not crazy to think the lawyers should have thought affirmatively about this question. Maybe 20 percent.

• The Volkswagen engineers, together with the in-house lawyers, came up with a justification for why what they were doing was OK, and got a green light from an outside law firm. As unlikely as it may seem, I’ll call this 5 percent, because the outside firm may have had incomplete information and may have viewed its role as “providing support” to Volkswagen’s actions.

If my handicapping is reasonably correct, then most of the literature around the role of lawyers and their ethical duty is pretty irrelevant, because it assumes that management tees up questions for lawyers and then lawyers offer sage and ethical counsel, which in the aggregate reduces risk.

The real question is “were the lawyers engaged enough in the business to know what was going on?” If they were, it seems certain that they could have prevented this manipulation from occurring.

So how can lawyers truly be effective in managing risk?

Maybe spend less time broadly claiming to reduce risk, and more time really understanding the business and the sources of risk. Skilled lawyers can combine the roles of a trusted problem solver with independent judgment and integrated understanding, working with the people making risk-based decisions. Since these kind of corporate shortcuts almost always result in disaster in a transparent world, it’s just common sense and enlightened self-interest that any manager can apply to avoid them. It doesn’t require a distinctive notion of professional formation to, as the president says, “don’t do stupid stuff,” and it may be that a lot of our self-definition around professional norms reduces the chance of being appropriately engaged.

In Volkswagen, not knowing was just as bad as knowing and acquiescing. Maybe we should start talking about a duty to know what’s going on.

Paul Lippe is the CEO of the Legal OnRamp, a Silicon Valley-based initiative founded in cooperation with Cisco Systems to improve legal quality and efficiency through collaboration, automation and process re-engineering.

Editor’s note: The New Normal is an ongoing discussion between Paul Lippe, the CEO of Legal OnRamp, Patrick Lamb, founding member of Valorem Law Group and their guests. New Normal contributors spend a lot of time thinking, writing and speaking about the changes occurring in the delivery of legal services. You’re invited to join their discussion.

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